A Reminder About Status Certificates and Reserve Funds
In my view, Paragraph 12 of the status certificate prescribed form is particularly important. In Paragraph 12, the condominium corporation must disclose any circumstances (known to the corporation) that could possibly result in an increase in common expenses (including a special assessment or an increase in regular condominium fees beyond inflation) at any time in the future.
A condominium’s reserve fund is “on track” (“adequate”) if the annual contributions to the reserve fund are expected to remain constant, increasing only by inflation into the future. If a condominium’s reserve fund does not meet this test – is not “on track” – this generally must be disclosed in Paragraph 12 of the status certificates.
The whole idea behind reserve fund studies and related reserve fund planning is to allow the condominium corporation to figure out, at least every three years, what increases (if any) are required for the reserve fund to be “on track” (and of course to ensure that those increases are built into the condominium’s reserve fund planning so that the reserve fund is brought on track within prescribed timeframes set out in the Regulations under the Condominium Act).
But I repeat: As long as there is any indication that the reserve fund may be “off track”, this generally must be disclosed in Paragraph 12 of the status certificates (until the reserve fund is “back on track”).
A reserve fund might be “off track” in any one or more of the following circumstances:
- If actual costs for some reserve fund expenditures have exceeded costs predicted by the most recent reserve fund study.
- If there is an indication that future costs may exceed the amounts predicted by the most recent reserve fund study.
- If unexpected or unplanned expenditures (not predicted by the most recent reserve fund study) have been, or may be, encountered.
- If some expenditures have occurred (or may occur) much earlier than predicted by the most recent reserve fund study.
- If some future expenditures may not be covered by the corporation’s most recent reserve fund study. [The minimum study period is only 30 years. In many cases, this may be “too short” to cover all anticipated future expenditures. Hopefully this minimum period will be increased in anticipated amendments to the Condominium Act and Regulations.]
- If actual inflation and/or interest are not as predicted in the most recent reserve fund study.
- Any other circumstance(s) that may result in the reserve fund being “off track”.
The challenge for Boards and Managers is to continuously assess all of these factors, and to consider the following questions: Is there any indication that the reserve fund could be off track? Do we need to say something in Paragraph 12 of the status certificates?
In my view, as long as you are careful to continuously ask yourselves these questions, you will know when to add appropriate wording to Paragraph 12 (in relation to the reserve fund).
If in doubt – if you are not sure what do to – I think that one excellent option is to consider arranging for an “early reserve fund study” (commissioned before the normal three-year deadline) and perhaps with an inspection, even if an inspection is not a statutory requirement for the particular reserve fund study. Depending upon the circumstances, this can be an excellent alternative for any condominium corporation that fears that the reserve fund “might be off track”.
Stay tuned to Condo Law News to keep up to date on the latest developments in Status Certificates and Reserve Funds!